There are an increasing number of mega-wealthy individuals, families and businesses out there with millions to invest in fast-growth ventures. Marc Barber meets the new breed of “super angels”
Sacrificing equity for finance isn’t a decision you take lightly. For every positive story about venture capital, there will be ten other tales of woe and horror from entrepreneurs who feel their business was stripped from them and flogged.
Jason Woodford, chief executive of marketing agency AI Digital, says: ‘We had offers on the table from respectable VCs, but those offers took away every incentive I valued – that kept me focused on running the business. If I had accepted an offer, I’d have lost control of the things that have made this company a success so far.’
Social networking site VideoJug raised £10 million from super angels – non-domiciled billionaires and a hedge fund – in April last year. The company’s chief financial officer, Rupert Ashe, is unequivocal about the benefits of this route: ‘You won’t waste your time speaking to VCs about your idea and then find they’ve invested in your main competitor.’
In an ideal world, an entrepreneur wants a backer who puts in a significant sum of cash for a reasonable stake and allows the CEO to grow the company accordingly. Woodford is proof that such heavenly arrangements can be found. ‘The VCs valued the company at £1.3 million and through the angel route I achieved a valuation of £2 million,’ he says.
Traditional business angels may have put in trifling amounts of between £10,000 and £50,000, but the starting point for the new breed of “super angels” is often a lot higher.
Legendary investor Jon Moulton nowadays invests a minimum of £250,000 and has £3 million in one venture. He refers to his angel investments as a ‘hobby’: the real work goes on at his private equity firm, Alchemy.
‘I’ve probably seen one in four of the companies in my portfolio at their offices. This is not a recommendation of how to do things; it’s how I do them,’ he says in his staccato, incisive manner.
Can’t win ’em all
Moulton has invested in hundreds of companies over the years and estimates that he’s come up negative on a third of them. ‘I mustn’t be very good at picking as otherwise I wouldn’t have lost the money that I have,’ says the man who turned around the fortunes of Parker Pen.
Attitude and ‘reality of proposition’ are vital for Moulton, who has numerous minority stakes and four controlling stakes in companies at the moment, ranging from bio-tech, financial services, IT, employment services and pubs. ‘It’s a huge range of companies, which is what I enjoy,’ he says, adding that he’ll stay around for five to seven years. ‘The companies are smaller so that makes the exits difficult as they tend to be a bit more volatile in their performance so you can’t easily sell them.’
Entrepreneurs who’ve worked with Moulton speak fondly about him. He’s regarded as ‘smart’ and ‘tells it how it is’, but he also listens and is ‘prepared to change his mind’. It’s not a shock to hear that when receiving a pitch he likes presentations to be ‘short and to the point’.
He says: ‘I like paper first actually. I have a very high reading speed and that enables me to reject a number of pitches without wasting an hour of my or the management’s time.’
As with any investor, numbers are the heart of a deal. Moulton continues: ‘I can be turned off from a presentation by people not mentioning how much money they want to raise and stupid things like that, which make it impossible to follow through. Establishing what it is they’d like me to buy doesn’t seem to be an unreasonable proposition.’
Apart from not being good at picking companies, Moulton says he’s learnt a couple of other lessons over the years: ‘Don’t back someone who has been divorced three times or more as that is a guaranteed failure. I’ve lost all my money on every occasion. It’s a 100 per cent record and is the only known rule of investing that appears to be without exception.’
Moreover, he prefers evidence of a track record, which means he tends to work with people he knows. ‘Mostly, I’ve made money from relatively mature people in their 40s and 50s, rather than in their 20s and early 30s, except for that brief period around 2000.’
A hands-off approach like Moulton’s will suit many owner-managers, especially if they have experience under their belts, while the knowledge and expertise some angels can bring to a business may be appreciated and welcomed by a younger entrepreneur.
Woodford states that Brighton-based AI Digital has benefited greatly from the involvement of Paul Whitwam, a man with 30 years’ experience as chairman of ICL Sorbus, a $1 billion (£500 million) subsidiary of Fujitsu. Woodford explains that Whitwam, who is an investor and now chairman of the company, has introduced a management structure, proper financial reporting and key performance indicators. ‘Beyond doubt, the exit value that he’s brought must be worth millions to the business already,’ says Woodford.
Whatever turns you on
Whitwam confesses to being ‘desperately turned on by business’. A serial investor, he left his last role at Sita, which provides IT and communications services to the air transport industry, last year. ‘I was in charge of the world,’ he jokes, noting that his role was global chief commercial officer. Rather than practise his swing on the golf courses of Sussex, he met Woodford and was excited by what he heard about the digital media sector. ‘It’s growing like crazy,’ he says.
The company has recently completed an acquisition and has a three-year expansion strategy to get turnover to £10 million. ‘I read Jason’s business plan and his idea was to be number one in Brighton. I said: “Well Jason, that’s an interesting approach but being number one in Brighton, while a great thing to achieve, is not our ultimate goal.”’
Whitwam identified that a layer of middle management needed to be put in place as Woodford, like many an entrepreneur, was doing too much. ‘A big role for the chief executive is going out and getting business, so the more time Jason spends out of the office the better,’ he says. ‘I want him to network and generate customers. [I can] get the basic processes in place so we know what’s happening in the business. Then there aren’t any surprises.’
A similar approach is taken by Gavin Price, who runs property business Dolphin Head: ‘We have experience to help these growing companies. Our forte is the financial aspect. Quite often, entrepreneurs don’t understand some of the basics of finance and we can handle this to let them drive the business.’
The company provides finance for early-stage prospects, investing up to £1 million and looking for a stake of at least 40 per cent. ‘We’re not a VC in a traditional sense as they are absent investors; they turn up to board meetings and that’s about it. If things go wrong, they’re pretty prescriptive in the action they take. We can be more flexible than that and can participate in day-to-day management if necessary.’
While Dolphin’s main activity is property, it has backed entrepreneurs operating in telecommunications, software, retail and furniture manufacturing. In 2000, it struck gold when APT, which it had been involved in for a decade, was sold to telecommunications company Marconi for £71.4 million.
Price says that normally the company would stick around for three to five years. He’s working with four companies at the moment and notes that it isn’t easy to find the right prospect to back. ‘I’m looking for a good product that has or will have a defendable market position. Importantly, I need to have some rapport with these people as it’s a partnership and I do, at a basic level, need to share some common values.’
According to the super angels, there is greater flexibility to act when something goes wrong than with a traditional VC. Price comments: ‘One thing for sure is that you will never follow the path you thought you were going to follow. We will ask questions and people have to perform, but if things don’t go to plan, then we do work together to get it back on track.’
Finding a super angel requires luck and getting out and about to speak to people. The proliferation of angel networks, which operate on the same lines as dating agencies and require membership fees, demonstrate that the number of wealthy people with cash to invest in business is growing. Naturally, there are no guarantees that a super angel will decide that your concern is the one for them. After all, as much as they enjoy the business life, they’re interested first and foremost in getting a return on their investment.
‘Opportunities are few and far between,’ says Price. ‘I have attended the likes of Venturefest and it’s a good event but you might see 20 prospects and follow up with two and then you could quickly cancel those two out.’